Journal article

Do interest rates drive inflation dynamics? An analysis of the cost channel of monetary transmission


Authors listTillmann, P

Publication year2008

Pages2723-2744

JournalJournal of Economic Dynamics and Control

Volume number32

Issue number9

DOI Linkhttps://doi.org/10.1016/j.jedc.2007.10.005

PublisherElsevier


Abstract

This paper proposes a novel approach to empirically assessing the impact of the cost channel of monetary transmission on the dynamics of inflation within a New Keynesian Phillips curve framework. According to the cost channel, higher interest rates translate into higher marginal costs of production and, eventually, into higher inflation. We exploit the present-value implications of the model to derive a series of fundamental inflation that is contrasted with actual inflation. We show that the cost channel adds significantly to the explanation of inflation dynamics in forward-looking sticky-price models for the US, the UK, and the Euro area. Moreover, the cost channel can explain inflation episodes that cannot be accounted for by the standard New Keynesian model.




Citation Styles

Harvard Citation styleTillmann, P. (2008) Do interest rates drive inflation dynamics? An analysis of the cost channel of monetary transmission, Journal of Economic Dynamics and Control, 32(9), pp. 2723-2744. https://doi.org/10.1016/j.jedc.2007.10.005

APA Citation styleTillmann, P. (2008). Do interest rates drive inflation dynamics? An analysis of the cost channel of monetary transmission. Journal of Economic Dynamics and Control. 32(9), 2723-2744. https://doi.org/10.1016/j.jedc.2007.10.005


Last updated on 2025-21-05 at 17:12